Uber suffers loss as judge grants drivers' suit class action status

Uber claims its drivers are independent contractors, rather than employees, because they can drive as little or as much as they want.

Uber

Tens of thousands of Uber drivers can now take part in a lawsuit that's calling into question how they're legally classified.

US District Judge Edward Chen on Tuesday granted class action status on a lawsuit in which three drivers are suing Uber for classifying them as independent contractors rather than employees. This decision could have a huge impact on Uber's business model and also create a ripple effect throughout the entire on-demand economy.

"This decision is a major victory for Uber drivers," said Shannon Liss-Riordan, the lawyer representing the drivers. "It will allow thousands of Uber drivers to participate in this case to challenge their misclassification as independent contractors."

Now that Chen has decided to grant class status in this case, Uber may have to contend with thousands of Uber drivers in California, rather than just the drivers who first brought the complaint (which has been dropped from three plaintiffs to two plaintiffs). That means if Uber loses the case, it might have to pay damages to all of those drivers.

Uber is a service that connects passengers with drivers via a smartphone app. Its current classification of drivers as contractors means the company is not responsible for all sorts of costs, including Social Security, health insurance, paid sick days and overtime. Drivers also supply and maintain their own cars, so Uber doesn't pay for gas, repairs and other related expenses. The company says that drivers are their own bosses and can drive as much or as little as they want and that's what makes them contractors, rather than employees.

Uber's lawyer Ted Boutrous, from the firm Gibson Dunn, said the company is likely to appeal Chen's decision because it's "based on several key legal errors."

"The mountain of evidence we submitted to the court -- including the declarations of over 400 drivers from across California -- demonstrates that two plaintiffs do not and cannot represent the interests of the thousands of other drivers who value the complete flexibility and autonomy they enjoy as independent contractors," Boutrous said.

Uber is the highest-valued venture-backed company in the world with a valuation of more than $50 billion, by some estimates. Much of this valuation, however, is based on Uber's potential profits made by running its ride-hailing service. If the company has to reimburse drivers' expenses, possible profits could diminish or costs could be transferred to passengers.

Judge Chen's decision

The driver classification lawsuit was originally filed in 2013. Over the past couple of years, Uber has tried to get the case thrown out. It filed a motion to dismiss the suit, which was denied in March, and last month it filed a 52-page motion to limit the case to just the three drivers.

Chen's decision on whether to grant class action status wasn't expected for another couple of months. In his 68-page order on Tuesday, he clarified that the group of drivers could only seek reimbursement for tips right now and must submit more evidence to qualify for reimbursement of other expenses, like car maintenance and gas. Also, the class will only include drivers for UberX, a service in which drivers use their own cars, and UberBlack, a high-end town car service. Additionally, the decision doesn't apply to drivers who began working for Uber after June 2014 and those who work through intermediary transportation companies.

Liss-Riordan said she will pursue individual lawsuits for those drivers who began driving for Uber after June 2014 and who work through third-party transportation companies. She also said she intends to eventually expand this case from California to the entire US. Liss-Riordan brought a similar suit against Uber rival Lyft, which is expected to have a class certification hearing in December.

Since Chen limited the class certification to just tips and drivers hired before June 2014, the class action status isn't as big of a win as it could've been, said labor and employment attorney Sandy Rappaport from the firm Hanson Bridgett. However, that doesn't mean Uber will have an easy time going forward.

"The same judge is hearing other similar cases against Uber," Rappaport said. "Some of his comments in the order indicate that Uber may have a tough road ahead arguing against class certification in those."

Several big players have weighed in on the employee-versus-independent contractor debate over the past few months. In July, Democratic presidential candidate Hillary Clinton questioned whether the on-demand economy does enough to protect workers; and in June, the California Labor Commission ruled that a former Uber driver, Barbara Ann Berwick, is an employee, not a contractor.

In the wake of this battle, several on-demand companies appear to be re-thinking the independent contractor classification. The grocery-delivery startup Instacart said in June that it's switching hundreds of its personal shoppers from contract workers to part-time employees. And house-cleaning startup Homejoy announced in July that it was permanently shutting down after being sued over the classification of its workers. Several similar lawsuits have also popped up against other on-demand companies, including Homejoy, Postmates, Handy, Shyp and Washio.

Still, despite the class action status in the case against Uber, it will ultimately be up to a jury to decide how the ride-hailing service must classify its drivers.